At HT Media, lower advertising revenue means better profits. How?

Healthy revenue and profit are the bedrock of any viable enterprise. The media business is no exception. But sometimes, some numbers make you sit up and take notice. For instance, in Q3FY18 (December, last year), despite declining ad revenue, HT Media posted a net profit of Rs 124 crore. To the surprise of most industry watchers, a year on year growth of 36%. A dive into their numbers follows

We are in transition. We, as in, the media business. 

Globally, the word transition has seen much play by all sorts of media companies to explain what they are up to. Or what they are going to do next. The problem with transition though is that in its garb, everything flies. And sometimes it becomes difficult to distinguish, which is which. Like, where is the value getting created or destroyed? An often used analogy for this is changing engines mid-flight. 

A case in point in the Indian media business is HT Media, publisher of the third largest English news daily Hindustan Times by circulation. The company is listed on the stock exchange, one of the very few who are. 

For more than two years now, HT Media has been trying to transition, from print to a digital newsroom. It hasn’t been easy. “And that is why we want to shield [investors] from the vagaries,” Piyush Gupta, group CFO of HT Media explained to analysts in October 2017. Specifically, the reason why the company is looking to spin off many of its digital businesses into a new listed entity. “We have seen that in spite of our best effort in the first year, we were not able to turn in a profit in HT Digital Streams.” 

The symptoms manifested in February last year when the company shuttered four editions and three bureaus across the country as it began to undertake drastic cost-cutting measures. It was reported that over 150 journalists were forced to resign from the company, but the real numbers are unclear. In Q2FY18, the company posted a net profit of Rs 66 crore ($9.92 million), up 113% year-on-year (YoY), despite declining advertising revenue.

One would expect that the net profit would taper off in the following quarter. But the company posted a net profit of Rs 124 crore ($18.64 million) in the following quarter, even as ad revenues continued to decline. For context, the company posted advertising revenues of Rs 451.6 crore ($67.88 million) in Q3FY18. It had posted ad revenue of Rs 452 crore ($67.94 million) back in Q3FY14. That’s four years apart. Zero change.

Turns out, even though HT Media was done with cost optimisation, it wasn’t done without restructuring its business. In the last three months, the company has made significant gains by selling off land parcels and merging and demerging its digital businesses.

In Q3, Gupta said that the media company sold land parcels which resulted in a one-time profit of Rs 31 crore ($4.66 million). HT Campus, a digital database of colleges which also provides preparation test papers, was merged into the parent company. The transaction resulted in a gain of Rs 20 crore ($3 million) due to a tax write-back. HT Digital Streams, the company’s “multimedia content creation” business—created in November 2015 to make tailored content for the internet—was sold to another HT Media subsidiary called Digicontent Limited for Rs 76.7 crore ($11.53 million). The transaction resulted in a one-time gain of Rs 15.3 crore ($2.3 million). In layman’s terms, the company shifted money from one pocket to another and called it a sale and booked a profit over it.

But the company only made a profit of Rs 58.7 crore ($8.82 million) from its core operations. That’s not a lot of money.

Some left behind
The new entity which will be listed is called Digicontent Limited. It includes all the websites that were under HT Digital Streams. However, Shine.com and HT Campus will not be a part of this; they'll remain with the parent company

“Unlocking value”
In FY16-17, HT Media undertook its transformation to a digital newsroom, creating HT Digital Streams. In becoming “digital first”, employees were required to take training modules for making an integrated newsroom with both print and online desks working side-by-side. It was also making strategic partnerships with Google, Facebook and UC News to acquire new readers. It signed up for Instant Articles and Accelerated Mobile Pages with Facebook and Google, respectively. Both tools promised faster page loading on mobile and reader retention. The websites hindustantimes.com, livemint.com, and livehindustan.com were revamped with better user interface and user experience. 

At the same time, all content creation costs were being sunk into HT Digital Streams. 

New employees hired today are being called content creators/producers and not journalists. HT Digital Streams is meant to create content for the print product as well and there is a revenue-sharing agreement with the parent company through a transfer pricing mechanism.

“So a business decision is not based on a single outcome. In this case, the company is thinking of several outcomes,” a former management executive of HT Media who requested not to be named said.

Journalists have been transferred to this new entity so that the company can side-step the protections offered under the Working Journalists Act. This allows flexibility to control manpower costs, he added.

Besides, making a separate entity would spare them from being answerable for quarter-on-quarter performance. “The existing companies, HT Media and Hindustan Media Ventures Limited, could be delisted,” he said.  

Another incentive was the chance to better the numbers. “They plan to show the digital unit as more attractive,” said a veteran executive who has worked with multiple media houses who requested not to be named. He explained that most media houses engage in some amount of financial engineering to make their digital entities more attractive. He gave an example of the arrangement between Bennett, Coleman and Co Limited (BCCL), the publisher of the Times of India (TOI), and Times Internet, the digital arm which handles all of its online businesses and investments. “There is a reverse payment from BCCL to Times Internet. That reverse payment is an agreement with Times Internet where it will run Economic Times and TOI’swebsite on behalf of BCCL, and that’s why BCCL pays 70% of the cost of that,” he added.  

He wagers that there is a similar set-up with HT Digital Streams, making it more attractive than it already is. The Ken was unable to independently verify the existence of a reverse payment for maintaining the website. But in the annual filings with the registrar of companies, HT Digital Streams did mention that business operations included management of advertising time on their websites. 

“Suppose you had a Rs 2,000 crore [$300.63 million] balance sheet, and you had a Rs 100 [$15.03 million] crore balance sheet where you know that the [investment returns] multiplier is much higher. Print multipliers are not that great. Nobody will give you more than a 5x or 4x [returns in print]. You are better served propping up your internet business,” the veteran executive added. 

Growth in digital is hard now
In the backdrop of Facebook de-prioritising news and Google tightening its hold on online advertising by blocking intrusive ads, what really hurts HT Media’s growth prospect is their decreasing online readership. At the end of March 2017, chairperson Shobhana Bhartia said hindustantimes.com had a monthly 100 million views and around 30 million unique visitors. Livemint.com had around 30 million monthly views and around 11 million unique visitors. 

In December 2017, an industry source who requested not to be named said that all of HT Media’s websites had 39 million unique visitors citing a comScore report.

HT Digital Streams currently has three modes of revenue—programmatic advertising, direct sale of ads, and brand solutions. For FY16-17, HT Digital Streams reported an operational revenue of Rs 230.77 crore ($34.69 million). For the whole year, it posted a loss of Rs 9.34 crore ($1.4 million).

HT Digital Streams’ operations are now reported under a new segment called Multimedia Content Management (MMCM) and for the nine-month period ending December 2018, it had revenues of Rs 140.37 crore ($21.1 million) and a declining profit before tax (PBT) of Rs 1.77 crore ($266,000). As opposed to a PBT of $3.72 million in the same period last year.

Ambrish Bajaj, head of product at HT Media, declined to give a segmentation of the results. He also declined to talk about the different products that the company would be building in the future.

Observers and executives say that HT Media has got to build more avenues for revenue in the digital space if it needs to survive. “You can’t build a model around programmatic advertising. It can be a little bit of an icing on the cake at best,” said a CEO of a digital news website who requested not to be named. He noted that most legacy media organisations who go into online rely on programmatic advertising. This, he feels, is unsustainable in the long run and leaves them beholden to large tech platforms such as Google and Facebook. 

The CEO commented that HT Media’s decline in online readership could be attributed to the lack of content differentiation. “For legacy media, the challenge is how do you differentiate between legacy content and the digital-only and what is your true cost.” 

Print is faltering as well
At the end of FY16-17, Bhartia insisted that the focus on digital would not come at the cost of the print business in the annual report. Today, the focus on digital is unclear with declining readership and the print business, too, is faltering. 

English print ad revenue from the flagship Hindustan Times and Mintdeclined 8% with a 15% fall in circulation revenue YoY. The only bright spot in the print business was the Hindi ad revenue which inched up by 5% YoY to Rs 177 crore ($26.6 million). Overall, the print segment’s advertising and circulation revenue fell 6%.

The management attributed the soft revenues to the lower ad spending courtesy the Goods and Services Tax (GST) and the Real Estate Regulatory Act (RERA). A couple of quarters ago, the management had attributed it to the demonetisation of Rs 500 and Rs 1000 notes by the Indian government. 
Another indicator of print ad revenue can be seen in the pagination of HT Media. Pagination is the breakup of text into different pages. The management has indicated that it has been seeing lower pagination over a couple of quarters which has led to lower raw materials’ cost (newsprint). More pagination indicates that there are more ads coming into the newspaper. Raw materials cost fell by 5.9% YoY.

“Profitability is a part of two things—cost and revenue. Revenue is not in your hands, cost is in your hands, and they have [cut costs]. Now they have to wait for the revenue uptick to start,” Ankit Kedia, a research analyst at Centrum Broking, told The Ken. “It will take time [for ad revenue] to recover. I think it will take a couple of more quarters. See the economy is not in the best shape, right? So you need to look at it in that perspective.”

An aside
When I started off as a journalist, a senior editor told me that I have to panic if a newspaper started seeing lower ads from real estate

But other media executives are not as optimistic. The executive quoted above said that advertising revenue is generally muted before the year of a general election.

A lesson to be learned
HT Media’s situation seems similar to the one newspaper publishers faced in the US in 2001 as online publishing started to eat into print’s profitability. Like the beleaguered Tronc (formerly Tribune Publishing), HT Media also centralised its manufacturing and production in a couple of centres and shut down editions and bureaus. Could a similar situation prevail in India? The story so far in print publishing is that it is thriving in India and the internet has not posed a significant threat, yet. 

The CEO quoted above doesn’t think the situation is as dire. 

“I think that Indian media still have a few advantages going for them. For example, HT Media’s Hindustan is vigorously profitable from what I can tell. Maybe if you look at the core business, it’s not as healthy as it should be but it’s nowhere like the free fall in America,” he says.

He adds that all legacy media, if they play their cards right, can transition to digital well as they have headroom of around 3-4 years. 

A good example of such a transition is Comcast, he says. “In India, you have Zee and Star and these companies will grow bigger and stronger and they have another competition with Netflix and Amazon.” But HT Media and others ceded a crucial part of their online distribution to Facebook and Google and perhaps this is the lesson that they should learn from their digital play.